Thinking about Long-Term Contracts

One of the things I like to try and do with the 108 blog is tease out some concepts and put them into writing or video form to try and explain them in a manner that allows for easier consumption.  It is sometimes irksome for me when a content provider will go ahead and assume that the consumer is hip to their lingo, their vernacular if you will and assume that they have already taken Sabrmetrics 201, back at Moraine Valley College during the summer of ’99.  If you ask me, unless you are writing for one of the big nerd sites, I think it’s bad business, fuck, even for them, I still think it’s bad business.  Why not do better?

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Anywho, today I wanted to discuss Long-Term Contracts and how they get misconstrued in the public and probably by me and you, the average sports fan.  I’ll use baseball as the example, because, fuck it, that’s what I am using, plus the other sports are too hard, with their max contracts and signing bonuses and un-guaranteed monies and 17 year deals to amortize vs the salary cap.  Jesus Fuck!

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I also plan to use WAR (Wins Above Replacement) as a proxy for expected value, now I know some of yous (this is Bridgeport) don’t like WAR,  but I am using it in the interest of simplicity.  For the uninitiated, WAR is basically a calculation that tries to measure how much a player contributes to the team winning above and beyond the readily available AAA player that a team could have for the league minimum.  There are various different types of this calculation.  I won’t go over all of those types or the nuances or differences of those types as they are immaterial to the discussion.  That’s a whole topic on it’s own that we shan’t get into today.

Let’s for example get into a THEORETICAL 10 year contract, which is for $300M, now this is totally fictional and is not trying to depict any player that the White Sox might have been trying to sign less than 18 months ago.  Below is an amortization table of the contract along with “Expected WAR” helping us determine the value the player is generating each year of the contract.  The table denotes at the top that we are assuming that it costs $10M to buy 1 WAR (again, just an example, you can use any set of values for $/WAR and get the same type of conclusion, I am just using $10M/WAR because it is simple math).

10 year

As you can see in the table above, we have 5 columns, Yr (which is just the year of the contract), Expected WAR, Expected Value $$ (this is taking Expected WAR and multiplying by the aforementioned $10M per WAR to get a “Value”), Actual $$$ (this is the cash paid to the player, sometimes these amounts are staggered or deferred or back loaded, but in this instance, I straight-lined it to make it a more straightforward concept to explain) and Excess / Deficit (which is the difference between the Expected Value $$$ or what the player is in theory earning AND what the player is actually making “Actual $$$”).

YEARS 1-3

Please direct your attention to column Excess / Deficit, in theoretical years 1-3, the player is well outperforming his paid value, by a cumulative $55M over those years ($20M year 1, $20M year 2 & $15M year 3). This is great and exactly the point of the signing. A BIG contract like this is usually inked by a team, that is about ready to make a Flag Fly Forever, so they need to put a high value player in one of the holes on their roster. The excess is important too. These long term contracts are specifically structured to have the player being slightly underpaid at the beginning and slightly overpaid at the end. This is done so that the team can afford a few more needed players when they are trying to win it all (oh and also Time Value of Money, but that’s a topic for a different blog).

Fan Since 1962 IROC-Z
1987 Iroc-Z that Fan Since 1962 probably had

I like to think of these long-term contracts like buying a car. Remember in 1987 when you bought that brand new Iroc-Z, of course you do. You couldn’t afford that fucking shit straight up, so you went with some financing, which is in effect what a long-term contract really represents. Oh man, you love the hell outta that car!! And it performed great!! Exceeded your expectations even, and you were proud to have it…..just like this Long-Term Player Contract

YEARS 4-8

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Now if you look at years 4-8 in the table, the player, over that time basically breaks even versus what he is paid. Said another way the players’ performance is equal to compensation.

YEARS 9-10

And finally years 9-10 the team is paying the player a lot of money and he is expected to stink. Sure, he’ll have a heroic moment or two, but he’ll likely piss you off more than he ever did. What was once pride, turns into terror as you see him come up in a big spot in the game and you hope that there will be a flash of old glory, but you realize that player is long gone.

How’s your old Iroc-Z doing at that time? Not good. You have ALMOST paid off the note, but you just blew the transmission and it’s got a lot of wear and tear on it. You are at the point of debating to pay for the new transmission or just junking this thing.  As much as you try to put on a brave face, you know it’s over.

ANYTHING ELSE??

Yes, the table above is an expected outcome, real life is much more chaotic than that, more than likely you’ll end up somewhere between holding the bag on an “injury riddled / career over” Prince Fielder OR you’ll get Max Scherzer and not give a fuck what the team is paying him he’s so got-damn good. Also, the table meant to show broad strokes, in reality, as you are able to see right now with the MLB vs MLBPA negotiations, the owners aren’t likely to give a “FAIR DEAL” so I’d expect the table above, when it is actually crafted to be about a 10-15% discount in favor of the team, Expected Value vs $.

SO…..AS FANS, WHY ARE WE SO SCARED OF LONG-TERM CONTRACTS???

One

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As humans, we fear loss much more than we desire gain. LOSS AVERSION is REAL!!  So is RECENCY BIAS and they do a good job of clobbering us when trying to see this clearly.

Two

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We accept Team Ownership as an authority figure and listen to their rhetoric as if it were factual and not an attempt to curry public favor. Juxtapose one of the main story lines from The Last Dance, where Scottie Pippen, massively out-performed his contract. I heard some clamoring on Scottie’s side, but mostly, even smart, sensible, intelligent adults were basically calling him a SUCKER for signing the deal. Now, let’s flip the script, when someone like Vernon Wells is making 8% of GDP and sucking it up out there for the Los Angeles Angels of Anaheim in Los Angeles, guess what happens, the masses ALSO SIDE WITH OWNERSHIP AGAIN!!! “We can’t bring in anymore quality players because that bum over there is robbing us.” I’d like yous to all think deeply about this one and why you treat your team owner like your daddy and believe everything they say (clarification, team owner includes GM, SVP and any other Front Office time communicating “the message”, they are all one thing, basically).

Three

Laughing Scott Boras

Players and Agents are stupid. They aren’t REALLY stupid, they just stink at crafting their public message. The Players I blame fully and it is coming to fruition in this current negotiation that they have no hand. We discussed this on the Section 108 podcast, but they need to take a different tact, which some players are starting to do. They need to SHOW OUT more. Agents are generally smarter than this with public relations and I’d say Scott Boras actually does do some of this, but when a player is outperforming their contract, they should make a spectacle of it. Make sure EVERYONE knows it!!!

I hope this will give you a little perspective on these situations and don’t just dunk on the player at the end of his deal that has given you, the fan, sufficient value and is finally just getting the remaining shekels he’s owed.

-BeefLoaf

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